MUMBAI--State Bank of India's (500112.BY) shares fell to a nearly three-month low Friday as investors focussed more on a sharp rise in bad loans than a forecast-exceeding first-quarter profit and robust loan growth from the nation's largest lender by assets.

Gross bad loans at the state-run bank rose to 4.99% of total loans as of end-June, compared with 3.52% a year earlier 4.44% three months before. It set aside 27.90 billion ($504 million) as provisions against bad loans.

State Bank of India's poor asset quality is an indicator that high interest rates and slowing growth have begun to take a toll on Asia's third-largest economy. India's factory output shrank in three of the four months through June as industries scaled back investments because of high interest rates that are driving up funding costs and sluggish demand both at home and abroad.

Shares of the bank dropped to 1,877.55 rupees, their lowest since May 18, on the Bombay Stock Exchange after the results. In late afternoon trade, they were down 4.5% at 1,833.30, compared with a nearly flat benchmark Sensitive Index.

The shares tanked despite the bank's net profit jumping more-than twofold in its fiscal first quarter through June. Its year-earlier profit was exceptionally low due to higher provisioning and depreciation on investments.

State Bank of India posted a net profit of 37.52 billion rupees in the past quarter, compared with 15.84 billion rupees a year earlier and above the 36.41 billion rupees estimated in a Dow Jones Newswires poll of eight analysts.

The lender's asset quality reflects how the broader economy is performing, Hemindra Hazari, research head at brokerage Nirmal Bang Institutional Securities, told television news channel CNBC-TV18.

The house has a sell recommendation on the stock.

Pressure on its loan book could mount as clients could find it difficult to repay loans in the face of a bleak economic outlook. At the same time, interest rates are high as the central bank, besieged by fast inflation, has raised its policy rate 13 times in the past two-and-a-half years but cut it only once.

The central bank has recently lowered the country's economic growth estimate to 6.5% for the current fiscal year, followed by similar actions by ratings companies Moody's and Crisil.

Despite the macroeconomic concerns, the bank reported a 20% jump in loans in the past quarter with lending to large companies and the agriculture sector accounting for most of the growth.

Its net interest income--the equivalent of net revenues for companies in other sector--rose nearly 15% to 111.19 billion rupees.

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